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Why LTC Partnerships Will Ultimately Save Medicaid Costs

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A recent report from the Government Accountability Office argued that state Partnerships for LTC programs “are unlikely to result in Medicaid savings.”

I disagree. Because the GAO documented its methodology well, I was able to identify several refinements to its calculations that would have dramatically changed its conclusions. In stark contrast to the GAO findings, I conclude that Partnership programs will produce Medicaid savings that are likely to be significant.

In reviewing my rough estimates, please note the nature of the GAO calculation: Medicaid Benefit Reductions (MBR) – Increased Expenses (IE) = Medicaid Savings.

If MBR=100 and IE=99, the equation becomes 100-99=1 unit of savings. If MBR should be 150, the result becomes 51. In this example, a 50% error in either MBR or IE produces a 5000% error in Medicaid Savings.

My conclusions are based on the following points:

1. I believe the GAO analysis ignored differences in long term care insurance purchasing based on affluence. Compared to less affluent people, more affluent people are much more likely to:

oPurchase LTC insurance in the absence of state Partnership programs;

oBuy longer benefit periods;

oHave significant assets to spend down after policy expiration before qualifying for Medicaid;

oHave significant assets available for estate recovery; and

oBe income-ineligible or home-asset-ineligible following policy expiration.

On top of that, I conclude that the less affluent are more likely to over-insure, although with short benefit periods

Reflecting these considerations would have removed any fears of Medicaid expense increases and projected at least 75% more in Medicaid benefits reductions.

2. I believe the GAO ignored investment, pension and Social Security income that would accrue while on claim and the additional investment income that would subsequently accrue on protected Partnership assets. Such income would increase GAO’s projected Medicaid benefit reductions by more than 67%.

3. The GAO ignored the value of the Partnerships’ mandatory compound benefit increase features, which I’ve roughly estimated will add 25% to the value of traditional LTC insurance.

4. The GAO overestimated the likelihood that people would buy traditional LTC insurance if there were no Partnerships. A small 5% error (e.g., 75% vs. their 80% figure) would increase Medicaid benefits reductions by more than 25%.

I have not estimated the impact of the following:

5. The GAO’s results were distorted by assuming that all policies have 3-year benefit periods and that all policies expire after 3 years of LTC.

6. The study ignored planned or unplanned property transfers. It is hard to quantify the impact of fewer transfers, but each person engaging in Medicaid planning likely costs Medicaid more than $100,000.

7. The GAO did not consider that Partnerships improve government bottom lines by increasing premium taxes from insurers; income taxes from brokers and LTC providers; and tax on investment income earned by LTC recipients and possibly estate taxes–while reducing costs incurred by processing Medicaid applications, claim payments and estate recoveries.

Based on these considerations, the GAO analysis seems to be significantly flawed.

Let’s step back and consider that Partnerships could increase Medicaid costs only relative to people who:

oHave meaningful assets;

oWould not have disposed of those assets;

oWould have purchased LTC insurance in the absence of the Partnership program;

oDeplete their policies (which is unlikely, considering their longer benefit periods);

oContinue to need LTC after their policies expire;

oSubsequently spend down all excess assets (hard to do with long benefit periods and assets growth);

oRemain income-and-house-value-eligible (very unlikely);

oIncur Medicaid benefits; and

oDo not leave estates able to generate asset recovery from non-countable assets (also unlikely).

Ironically, therefore, affluent people can benefit from Partnership incentives only if they transfer assets.

If the affluent are of a mind to transfer assets, then the Partnership program might dissuade them from doing so, thus saving money for Medicaid that GAO has ignored.

Meanwhile, less affluent Partnership buyers would be much less likely to purchase LTC insurance in the absence of the Partnership program, much more likely to purchase a short benefit period and significantly more likely to over-insure, using the GAO’s term. (The GAO defines “over-insurance” as having a maximum lifetime benefit that exceeds one’s assets.) So the GAO has hugely understated the Medicaid savings they would generate.

Clearly, the less affluent are much more likely to purchase over-insurance as they may protect against a 1-year, 2-year, 3-year or perhaps longer need for LTC even if they do not have a corresponding amount of assets. I agree with the GAO that such over-insurance would yield huge Medicaid savings, but the GAO ignored those savings in its analysis.

As I noted, I believe that the over-simplifications of the GAO analysis caused it to reach false conclusions. The Partnerships will save Medicaid money.